Everything you need to know about the Japanese stimulus

January 11, 2013

Fiscal stimulus may be passé in the United States, but, like Bill Murray in "Lost in Translation," it's big in Japan.

Shinzō Abe, Japan's newly elected prime minister, has announced ¥10.3 trillion (or about $116 billion) in new spending to promote growth. To clear up what this actually means, we'll break it down for you.

Who is Shinzō Abe?


Shinzō Abe is just throwing out fliff like it's fliff night. (Itsuo Inouye/AP)

Shinzō Abe is the leader of the Liberal Democratic Party, or LDP, the center-right party that has dominated Japanese politics since its creation in 1955. During the Cold War, the LDP received substantial financial backing from the CIA. Even after the fall of the Soviet Union, it has only been out of power twice: during a brief period in 1993 and 1994, when a left-leaning coalition of eight parties formed a government, and between 2009 and Dec. 26, 2012, when the liberal-leaning Democratic Party of Japan, or DPJ, had a majority. For the 38-year period between 1955 and 1993, it never lost power once.

Abe has served as prime minister before, in office for a year between September 2006 and September 2007. He succeeded Junichiro Koizumi, a charismatic free-marketer and defense hawk who served for five years (the fifth-longest tenure of any Japanese PM). Abe was one of three LDP leaders to serve a year apiece after Koizumi, being followed by Yasuo Fukuda and then by Taro Aso, who led the party when it was defeated by the DPJ in 2009.

Abe's first term was racked by scandal. His first agriculture minister, Toshikatsu Matsuoka, hanged himself in the midst of a financial scandal (Matsuoka was alleged to have expensed too much for utilities at his office, presumably pocketing the rest). Matsuoka's successor, Norihiko Akagi, lasted two months before resigning for doing exactly the same thing. Akagi's successor lasted about a month, and that minister's successor, Takehiko Endo, lasted all of seven days before resigning over — you guessed it — illicit use of public funds. This contributed to Abe's decision to resign in 2007 and hand the reins to Fukuda.

But the DPJ has had its own troubles since taking power. Its leader Yukio Hatoyama took over as prime minister in 2009 but resigned in 2010 after less than a year in office after breaking a campaign promise to close the U.S. military base in Okinawa. His successor, Naoto Kan, lasted a little longer, but resigned in 2011 following criticism of his handling of that year's massive earthquake and tsunami and and the Fukushima nuclear disaster. Yoshihiko Noda succeeded Kan and governed for the past year, but called early elections after pushing through an unpopular doubling of the national consumption tax, from 5 percent to 10 percent.

Abe won back the presidency of the LDP in September and beat Noda in the December general elections in a landslide, starting his second stint as prime minister on Dec. 26.

Why is he launching this stimulus?

After a strong first quarter of 2012, in which the Japanese economy expanded by an annual rate of 5.3 percent, growth fell sharply to 0.7 percent in the second quarter, and turned negative in the third quarter. The economy shrank 0.9 percent between July and September, which amounted to a annual contraction of 3.5 percent. This all contributed to a widespread impression that the country was poised for a recession, or at the very least a period of anemic growth. The Mizuho Research Institute in Tokyo, for example, predicts growth of 1.1 percent in fiscal year 2013.

As a result, Abe ran on a platform of aggressive fiscal and monetary stimulus. During the campaign, he called for the Bank of Japan to double its inflation target from 1 percent to 3 percent to encourage growth, as well as unlimited quantitative easing to make sure that target is hit. He already appears to have persuaded persuaded the BOJ to agree to a 2 percent percent inflation target. Critics argue that Abe is threatening the bank's independence by directly urging specific policy measures, but given the huge mandate he won in last month's election, it is proving hard for the bank to resist.

What will the stimulus be spent on?

 The above diagram is posted on the prime minister's Web site; I suspect the final version will be clearer that Abe means there will be no pork-barrel spending. Details are sparse at this point, but we know that the plan will total ¥10.3 trillion, or $116 billion, not including local and private-sector contributions, which bring the total to ¥20.2 trillion, or $227 billion. The federal measures include ¥3.8 trillion ($43 billion) for disaster relief as part of the ongoing earthquake/Fukushima recovery, ¥3.1 trillion ($34.7 billion) for child care, medical care and aid to local areas, and ¥100 billion ($1.13 billion) in increased defense spending.

How big a stimulus is this?


If IMF chief economist Olivier Blanchard is right and the fiscal multiplier is 1.5, then Abe is being too pessimistic. (Stephen Jaffe/IMF)

Given Japan's 2011 GDP of $5.87 trillion, the $116 billion federal package amounts to about 2 percent of GDP. Abe has predicted the plan would boost growth by 2 percent of GDP, which indicates that he believes the plan will have a fiscal multiplier of 1, with each dollar of stimulus producing a dollar of GDP. If anything, this projection is overly pessimistic. The IMF has recently revised its opinion on fiscal stimulus, arguing that the multiplier is closer to 1.5, suggesting that Abe's plan would boost growth by 3 percent. Nine out of the 15 studies on the U.S. stimulus package from 2009 found multipliers over 1, with infrastructure programs like Abe's being particularly effective.

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